Getting serious about climate change means putting a price on carbon

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The Paris climate change talks will dominate the political debate over the coming week. The focus will be on whether the Australian prime minister joins over 140 other leaders to shepherd in a deal to cut greenhouse gasses and tackle climate change. There are expectations Prime Minister Turnbull may rise to the occasion, and 'stand-up for climate change', as The Sydney Morning Herald reports.

On the domestic front, tax reform continues to be the major issue, and the Turnbull government has emphasised that all options are on the table. As the government's tax reform discussion paper states, the objective is to create a tax system that will support a 'modern economy that will support our way of life'. Dealing with climate change has to be part of a modern economy.

Climate change and tax reform are inextricably linked through imposing a price on carbon; a carbon tax.

If the world is serious about doing something meaningful about reducing greenhouse gas emissions in the most efficient way possible, it will have to put a price on carbon. This was highlighted in a paper prepared by the IMF in advance of the Paris meeting.

As the IMF pointed out, carbon pricing is preferred to regulatory approaches to curbing emissions because it:

Promotes the full range of mitigation opportunities across all sectors;

Aligns the private cost of emissions with their social cost;

Can raise significant revenue which, if used productively, minimises overall burdens on the economy, and

Is simpler, administratively, than multiple regulatory programs targeting different behaviour in different sectors.

As the IMF stated:

Carbon pricing can...play a critical role in meeting in the most efficient and effective way the[ climate change] commitments that countries are now entering into; it can also raise substantial revenues that can be used to reduce other, more distorting taxes.

In short, carbon pricing can address some of the major challenges that Australia faces.

And yet, in one of the most regrettable recent developments in Australian public policy, imposing a price on carbon — through either a carbon tax or an emissions trading scheme — has become a no-go area.

Carbon pricing is 'on the nose' in Australia because of politics and scare mongering; not as a result of a considered assessment of the merits of pricing carbon.

If the world is serious about reducing greenhouse gas emissions in the most efficient way possible, putting a price on carbon is a must. Currently about 40 countries are implementing some form of carbon pricing at the national level and over 20 sub-national governments have carbon pricing schemes. China is introducing an emissions trading system. But not Australia, which has the unenviable distinction of being the only country to abolish a carbon tax.

If Australia is serious about reducing emissions in the most efficient way possible, it should put pricing carbon on the tax reform table for, as the Prime Minister has said, nothing is off the table when considering tax reform options. It is time for Australia to move on from the simplistic claim that a price on carbon is nothing more than a 'great big new tax'.

The case against a carbon tax is it would raise the cost of living for Australians, mainly through higher gas and electricity prices. But so would an increase in the GST. In both cases, low income households could be compensated; as indeed they were when the carbon tax was introduced in 2011.

The focus of the tax reform is to find an equitable way to raise revenue. The opposition to raising the GST is that it is a regressive tax. However, not pricing carbon also raises equity issues. Omitting the price of emissions generated in energy use holds energy prices down. As the IMF points out, this is a highly inefficient way to assist low income households, because most of the benefits go to higher income groups.

And, as the IMF also notes, the revenue stream from introducing a price on carbon could be substantial, and this would present an opportunity to reduce other, more distorting taxes. In the first two years of the Australian carbon tax, it raised $15.4 billion. This is serious money when it comes to tax reform.

If Australia wants to make a mark in Paris in demonstrating its commitment to efficiently reducing carbon emissions, it should put a carbon tax on the tax reform table.